Certified Production & Operations Manager (POM) Practice Exam

If the output rate is increased but the average unit costs also increase, what are we experiencing?

1. Step-function scaleup

2. Diseconomies of scale

3. Value-added accounting

4. Market share erosion

The correct answer is: Diseconomies of scale

The scenario describes a situation where increasing the output rate leads to higher average unit costs. This phenomenon is a hallmark of diseconomies of scale, which occur when the scale of production rises to a point where the per-unit costs increase instead of decreasing. As organizations grow and production output becomes larger, they may encounter inefficiencies that can result in elevated costs. This can be due to a variety of factors, such as increased complexity in management, communication challenges, or over-utilization of resources that lead to diminished returns. In essence, when a business expands beyond an optimal size, the benefits of producing more may be overshadowed by rising costs, leading to diseconomies of scale. In contrast, the other options pertain to different aspects. Step-function scaleup refers to situations where production capacity increases in discrete "steps" rather than smoothly, value-added accounting focuses on assessing the value added at each stage of production for better financial insights, and market share erosion implies a decrease in a company's share of the overall market regardless of unit costs. Only the concept of diseconomies of scale accurately captures the essence of increasing output rates coupled with rising average unit costs.